How Tesco could really revolutionise the mortgage market

Paula Higgins says that Tesco should lead the way by rewarding loyal mortgage borrowers, not penalising them

August 8, 2012

The good news is that Tesco has entered the mortgage market. The bad news is the way that they have done it. A big new brand name lender is always welcome – it can only enhance competition and trust in the mortgage sector. Consumers – particularly those wary of high street banks – will be confident that Tesco won’t try to mis-sell to them. The supermarket says it wants to focus on simple, transparent, competitive mortgages – all good news for the homeowner.

But in reality, the Tesco mortgage offers little new to the market. The minimum deposit of 20% means that it will be of little help to first time homebuyers – this will be a mortgage for established homeowners only. The 5 year fixed rate of 3.89% for a borrower with a 30% deposit and its standard variable rate of 4.24% are above the other main lenders. The only real innovation is that Tesco allows borrowers to repay 20% of the loan in a single year without penalty – a welcome change from the normal 10%, but very few people will have enough money to take advantage of this. The Sunday Times and others have greeted the Tesco mortgage with dismay.

How Tesco could really revolutionise the market is by following the fundamental principle it deploys elsewhere in its empire – rewarding loyalty. Its pioneering loyalty card is key to its business success. But at present, Tesco is following other mortgage lenders by – in effect – punishing loyalty. Almost all mortgage lenders put customers on a higher rate once their introductory rate has come to an end (typically after 2,3 or 5 years) – and these introductory rates are only openly available for new customers, not existing ones (sometimes secretive business retention teams offer the deals to existing customers when they threaten to leave). Borrowers then have to go to other lenders to get the best rates. Tesco has the market clout to be true to themselves – offer the same rates to existing customers and new customers alike. It would be a PR masterstroke – they could run a marketing campaign saying “unlike other lenders, we won’t punish you for being a loyal customer.” It will mean a slower build of the business, but it would mean far less churn among their customers, building up a loyal long-term base.

Not punishing loyalty. Now that really would be revolutionary. Come on Tesco!